Peart Stevenson Associates Ltd v Holland

A contractual post-termination restraint imposed on a franchisee is enforceable only so far as reasonably necessary to protect the franchisor’s legitimate interests. A restraint protecting the goodwill of the franchised brand and the possibility of recruiting a replacement franchisee may be reasonable even if no replacement is identified during the restraint period.

A non-reliance clause does not provide a defence to fraudulent misrepresentation. Depending on its construction, it must either satisfy the reasonableness requirement in Misrepresentation Act 1967 and Unfair Contract Terms Act 1977, or satisfy the requirements for an evidential estoppel. A franchisor’s failure to prove actual loss caused by breach of a non-compete covenant limits recovery to nominal damages.

The claimant franchisor terminated a five-year franchise agreement with the defendant. It claimed unpaid fees, damages for breaches said to justify termination, and damages for breach of a one-year post-termination restraint.

The defendant counterclaimed damages for fraudulent misrepresentations concerning the franchise’s profitability, failure rate, profit margins and access to NICEIC certification. The principal issues were the enforceability of the restraint, the effect of contractual non-reliance provisions, and the assessment of loss. The court also considered whether the claimant had proved loss from the post-termination competition.

1. Termination damages. The defendant’s failure to pay sums due when time was of the essence, to provide sales reports, and to provide a customer list amounted to repudiatory breaches. The claimant was therefore entitled to damages for loss caused by termination. The proper contractual expiry date was 5 December 2010, not 5 December 2011, and damages were assessed at £20,430.71.
2. Post-termination restraint. Clause 15.1(a) was a reasonable restraint. The franchisor had a legitimate interest in protecting the goodwill of the Trade Name and avoiding deterrence of a potential replacement franchisee. The one-year period and territorial scope were not excessive. The defendant breached the non-compete covenant but did not solicit customers.
3. Loss. The claimant produced no evidence of actual loss caused by the non-compete breach. It recovered only nominal damages of £2.
4. Misrepresentation. The claimant fraudulently misrepresented the profit from its pilot operation, the franchisee failure rate, average profit margins and the availability of its NICEIC certification. Those representations induced the agreement. Clauses 17.12 and 17.14(a)(i) did not protect the claimant. On the approach treating them as provisions within Misrepresentation Act 1967 section 3, the claimant failed to establish reasonableness. On the alternative evidential-estoppel approach, the requirements identified in [1960] 1 WLR 196 were not met.
5. Final order. The defendant recovered £149,081.99, together with interest to be determined. The claimant’s claims were extinguished by the sums due to the defendant and were dismissed.